“Jumping out” the Retail Leases Act – a clarification

Today I posted an article about Verraty Pty Ltd v Richmond Football Club [2019] VCAT 1073.

I have had queries about paragraph (i) where I said:

“where the commencing rent under a new lease does not exceed $1,000,000 for the first 12 months,  before the lease is entered into the landlord should make an estimate of outgoings for the first 12 months of the lease and keep a record of the making of the estimate;”

The point I was intending to make is that where a new lease is being entered into and the rent is less than $1,000,000 (but when added to outgoings  “occupancy costs” exceed $1,000,000), a failure to make an estimate under s.4(3) could result in the lease (assuming it concerns “retail premises” (s.4(1)) being a “retail premises lease”. The reason  is that “occupancy costs” constitute rent and an estimate of outgoings made by the landlord (s.4(3)); in the absence of an estimate of outgoings  the “occupancy costs” will be restricted to the amount of the rent. There is no need to give the estimate to the tenant.

A new lease will be a “retail premises lease” where “occupancy costs” do not exceed $1,000,000 in which case it is necessary to give a written estimate under s.46.

 

 

 

 

 

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Retail premises leases can “jump out” of the Retail Leases Act

Can a “retail premises lease” (within the meaning of s.11 of the  Retail Leases Act 2003) cease to be a “retail premises lease” during its term? That long-standing question has finally been resolved.

In Verraty Pty Ltd v Richmond Football Club Ltd [2019] VCAT 1073 the Tribunal held that a lease could cease to a “retail premises lease” during the lease term. The lease was for a term of 20 years commencing 7 May 1998. A variation made in 2004 effected a surrender and regrant with the consequence that a “retail premises lease” was entered into at that time.  In April 2017 the tenant exercised an option to renew the Lease from 7 May 2018 for a term of 10 years.  The landlord claimed that the lease had ceased to be a “retail premises lease” from 7 May 2016 because “occupancy costs” were $1,000,000 or more and that the renewed lease was not a “retail premises lease”.

The issues were:

(a)  whether the lease ceased to be a “retail premises lease” for the period 7 May 2016 to 6 May 2017 and was therefore not governed by the Act;

(b)  if yes to (a), did the lease remain outside the ambit of the Act for the period 7 May 2017 to 6 May 2018; and

(c)   if yes to (b), was the renewed lease resulting from the exercise of the option a “retail premises lease”?

VCAT answered “yes” to each of the three questions.

Section 11 says, among other things, that the Act applies to a “retail premises lease”. Section 11(2) says that “….this Act only applies to a lease of premises if the premises are retail premises…at the time the lease is entered into….” (emphasis added)

While the Act does not contain a definition of “retail premises lease” the expression “retail premises” is defined in s.4(1). Where “occupancy costs” are $1,000,000 or more per annum premises are excluded from the definition of “retail premises” (s.4(2)(a)) and regulation 6 of the Retail Leases Regulations 2013). “Occupancy costs” are defined in s.4(3) to mean:

• the rent payable under the lease (s.4(3)(a)); and
• the outgoings, as estimated by the landlord, to which the tenant is liable to contribute under the lease (s.4(3)(b))

There is a note under s.4(3) that says s.46 requires the landlord to give the tenant a written estimate of the outgoings to which the tenant is liable to contribute.

The landlord alleged that the lease had ceased to be a “retail premises lease” on 7 May 2016 because the “occupancy costs” for the next 12 months were $1,000,000 or more.

The landlord gave the tenant an estimate of outgoings dated 12 May 2016 (Estimate) pursuant to s.46(2) of the Act for the landlord’s 12 month accounting period commencing on 7 May 2016. Section 46(3) requires an estimate to be given before a retail premises lease is entered into and in respect of each of the landlord’s accounting periods during the term of the lease, at least one month before the start of that period. Section 46(4) says that a tenant is not liable to contribute to any outgoings of which an estimate is required to be given to the tenant until the tenant is given that estimate. The Estimate was not given at least one month before the start of the landlord’s accounting period commencing 7 May 2016. The Estimate and the rent exceeded $1,000,000 for those 12 months.

On 3 May 2017 the landlord estimated the outgoings to which the tenant was liable to contribute for the 12 month accounting period commencing 7 May 2017. No written estimate was given to the tenant. The estimated outgoings and rent exceeded $1,000,000 for those 12 months.

The landlord contended that whether or not the lease was a “retail premises lease” was governed solely by s.4(3) and that s.46 was irrelevant – all the landlord had to do was make an estimate of outgoings –  a written estimate did not have to be given to the tenant. Consequently, it did not matter that the Estimate was not given within the time prescribed by s.46(3). The landlord also contended that because the lease ceased to be a “retail premises lease” on 7 May 2016 it was not required to given a written estimate under s.46 for the year commencing 7 May 2017 – all it had to was make an estimate of the outgoings under s.4(3).

The tenant contended, among other things, that a “retail premises lease” could not cease to be a “retail premises lease” during its term but that if a lease could cease to be a “retail premises lease” all the provisions made void by the Act were not revived – the lease continued without those provisions. The lease contained a “ratchet clause” that prevented the rent from decreasing – such clauses in a “retail premises lease” are void (s.35(3)).

The Tribunal held that:

• a lease could cease to be a “retail premises lease” during its term – s.11(2) prescribed the time at which a lease had to be a “retail premises lease” for the Act to apply but said nothing about a lease ceasing to be a “retail premises lease”;
• the landlord had to give an estimate under s.46(1) for the year commencing 7 May 2016 and, because the Estimate was give late, any outgoings referable to the period 7 May 2016 to 12 May 2016 had to be excluded from the estimate of outgoings;
• even with outgoings for the period 7 May 2016 to 12 May 2016 excluded, “occupancy costs” exceeded $1,000,000 for the 12 months commencing 7 May 2016 with the consequence that the Act did not apply for those 12 months;
• because the Act did not apply it was not necessary for the landlord to give an estimate of outgoings under s.46 for the accounting period commencing 7 May 2017 – all that the landlord had to do was to make an estimate of outgoings as required by s.4(3);
• the landlord made an estimate of outgoings on 3 May 2017 and, because “occupancy costs” exceeded $1,000,000 for the 12 months commencing 7 May 2017, the Act did not apply for those 12 months;
• the renewed lease was not a “retail premises lease”; and
• clauses in a lease that were void while the lease was a “retail premises lease” (such as the “ratchet clause”) were not void once the Act ceased to apply.

The Tribunal also held that the note at the foot of s.4(3) referring to s.46  was no more than a reminder that if the lease were a retail premises lease the landlord had to comply with s.46.

The tenant is likely to seek leave to appeal.

The following propositions emerge from the case:

(i)    where the commencing rent under a new lease does not exceed $1,000,000 for the first 12 months,  before the lease is entered into the landlord should make an estimate of outgoings (under s.4(3)) for the first 12 months of the lease and keep a record of the making of the estimate;

(ii)   where the estimate of outgoings plus the rent for the first 12 months exceeds $1,000,000 the lease will not be a “retail premises lease” and a written estimate of outgoings under s.46 need not be given to the tenant;

(iii)   where the estimate of outgoings (made under s.4(3)) plus the rent for the first 12 months does not exceed $1,000,000 it is necessary to give a written estimate of outgoings pursuant to s.46 to the tenant;

(iv)   a “retail premises lease” can cease to be such a lease during its term;

(v)  a lease can cease to be a “retail premises lease” during its term because “occupancy costs” exceed $1,000,000  provided an estimate of outgoings has been given under s.46;

(vi)  where a lease ceases to be a “retail premises lease” during its term the landlord should make an estimate of outgoings (under s.4(3) for each remaining 12 month accounting during the term but need not give a written estimate of outgoings (under s.46) to the tenant where “occupancy costs” exceed $1,000,000.

With respect to (vi), while the Tribunal did not determine whether a lease that has ceased to be a “retail premises lease” during its term can revert to being a “retail premises lease” during the term, it is likely that a lease can revert to being a “retail premises lease” during the term.